Minority Shareholders Proprietary Rights - Essay Example

Minority Shareholder’s Proprietary rights. The rights of the minority shareholders have always been sought for setting right the wrongs that might get done to them. The Gambotto case1 in Australia was the one that set the ball rolling when it came to minority shareholder rights. It has been upheld in a number of cases that any amendment to the articles of a company should stand the Allen Vs Gold Reefs (1900)2 test. According to this test, there were two limbs that need to be satisfied. One, the amendment must be for proper use and second, the amendment should not be oppressive on the minority shareholders of the company. As in the case of Gambotto in Australia, in a number of cases, the courts have taken cognizance to the fact that even if the plaintiff does not request for the two tests, the courts may and can subject the amendment to these tests and see to their fitment to the same. Failing which in either of the cases, the amendments may be nullified. The proprietary rights of the share holders has to be upheld but not at the cost of the company according to the British Law, in contrast to the Australian perception of the matter. Exercising of the majority powers by the share holders of a company is pretty rampant in the country. It is with utmost care and interest that the courts need to implement these laws so that the suppression of the shareholding minorities is protected and at the same time, the objectives of the company are not diluted. However, the point raised in the indicated quote is to ensure that the interest of both the minorities and that of the company should also be protected. In the name of protecting the interest of the minorities the company should not be ending up as a loser in the game thereby, bringing down the interests of the rest of the share holders of the company. In order to understand this, the idea of proprietary rights being protected has to be analysed. Proprietary rights in most cases have been the ownership rights or the right to own. In cases related to owning land or building there had not been contentions on the proprietary rights of a person and what is offered to one person is same as the other one3. Whereas in the case of share holder proprietary rights, the minority share holders rights might be different from what the majority share holder might have. The association of the company could be for one simple reason that of company making more profits or as high a profit as is legitimately possible. However, when the method to make the company more profitable does not make the individual or minority share holder profitable and oppresses his or her proprietary rights, then the violation occurs. As in the case of Greenhalgh Vs Arderne Cinemas (1951)4, the proprietary rights could get violated when the company tries to meet the overall need of the company. This has to be ratified over a period of time. Rules brought in by the governmental bodies could result in minority share holders being given a raw deal as in the case of Gambotto. The rule of the majority dominating over the requirements and needs of the minority share holders has been in the law for more than a century now. It all started with the Allen Vs Golden Reef (1900) when the company tried to oppress the minority share holders. At the same time, the court has also held valid that the member cannot and should not vote in his own selfish interest ignoring the requirement of the company and the overall benefit that a company stands to gain. Such a voting pattern is also not accepted by the courts when they tend to vote in favour of a decision that is not in line with the best interests of the company5. The same is also valid when the person with the vote tries to suppress those share holders who do not have voting rights and by whose vote the entire process is stilted. As Mergary J held in the above referred case, there was ‘no right of a share holder to vote in his own selfish interest to injure his vote less fellow share holders by depriving them a cause of action and by stultifying the purpose for which the company is formed’. By intervening this way, the judge had referred to discontinuing the proceedings of the directors of the company against some of the share holders on similar lines. According to the English law on this factor of contention, it clearly states the following: 1. Any decision to alter the articles of association of the company should be done in the best interests of the company in the forefront irrespective of the individual interests. 2. Much the same way, the decisions that are taken to alter the life and style of a class of people should be so done taking into consideration the same set of people in one single unit. The law limits the power of the majority when it oppresses the minority share holders and when the majority try to violate the proprietary rights of the minorities. These share holders can of course, deny selling their shares at the price fixed by the company or by the board. In case of take over of a company, minority share holders’ interest is protected by the higher rate they get for their share holders6. The majority decisions or the right approach to the growth of the company should not get frustrated by the minority share holders and any large scale improvement in the operation of the company should not get hampered. This has been cited by the Committee while reviewing the company law. The changes in the company law to ensure that the protection that is needed for the share holders, particularly, the minority ones is accorded is imperative. However, as the committee says, the line that identifies what is proprietary and what is not proprietary and what is good for the company in the long run, is not an easy factor. As held in the Allen V Gold Reef case, the amendment of the articles is valid if it is for the good of the company and for the gain of every stake holder of the company. However, suppression or oppression of the minority share holders either by resorting to grabbing of their shares through amendments to the articles or by reducing the power exercised by them, need to be considered as wrongs. While most law recognise the articles of association of a company as a contract and is governed by the existing contracts law, many questions have come up as to why there should be additional legislation in this regard. The need to protect the share holders becomes important with large players in the market altering the course of the corporate business. This has been observed when the company shares get hijacked by such large operators who could control the equity market to their advantage. Their rights end when the other person’s rights start. And by contract, normally it is the will of the majority or the best interests of the company that decide on the course of action adopted by the company. The articles themselves are subservient to the memorandum and cannot possibly cross the boundaries set by it. However, as mentioned in the Charlesworth & Morse Company Law, the articles can be altered in line with the provisions of the act7. This is more in line with the Foss v Harbottle8 Principle. The company law provides for two different means of recourse for the minority share holders who get affected by the majority stake holders in a company. And these are the direct as well as the derivative actions provided for in the American Law. However, the same can be brought about in the UK using ‘the ultra vires exception’ and the ‘fraud on minority’ exception as well. The Foss v Harbottle rule came into play because of the clear assumption that the articles in the companies provide for ‘mismanagement’ and there is no need for the courts to interfere in the cases. This has been held valid by the Chancellor as in the case of Carlen v Drury9. Even in this case, though the judgment went against any intervention of the courts in the ‘internal’ matters of the company, it has been accepted that external adjudication is required when there is an internal dispute. Even in the case of Carlen Vs Drury out of the 1600 members in the company, three hundred of them brought the case against the company and its board. Under such cases, it is only right that the courts take over the case and pronounces their judgment in the cases of concern. The majority power ends when there is an internal dispute of reasonable magnitude. Similarly, it also ends when it violates the rights of the individual even if it is one single person who is being hurt by the new rule or law. Any amendment just cannot step on the toes of the other member or members. In the US, the law allows the share holders to go for remedies. While direct action suits are brought about by share holders who are directly affected by the action of the majority and claim a compensation or ratification based on such action; whereas in case of a derivative action, the share holder could bring about this action for the benefit of the corporation when he feels that there is mismanagement afloat10. This arises when the share holder feels that the board of directors have not taken enough action to protect the corporation from an external act or they feel that board themselves have wronged the corporation by taking an action that is not in line with the needs of the corporation. The gains out of direct action would go to the share holder who has been wronged and in the case of a derivative action it goes to the corporation. In the case of the UK company law, the provision for a derivative action is substantially nullified. The assumption is that the articles and the memorandum of the company provides for protecting the company from mismanagement. This has been repeatedly held by the courts and intervention into this activity might be low unless it falls under the other options; these being the violation of the minority law and ‘ultra vires’. Chancellors have strongly refused to intervene in ‘partnership squabbles’ or ‘mere passing improprieties’11. But this is not the way the whole process is to be looked at. There are always cases where such cases have been allowed by the court to be admitted only if the action and the derogation brought in by the case far out weighs the cost of running the case and the negative propaganda that goes into it. From the above discussion, the following recommendations could be concluded. 1. The majority may amend the articles well within the limits of the memorandum of understanding and shall also ensure that it protects the interests of every one concerned among the stake holders. 2. The entire corporation should be kept in view when such amendments are brought in. 3. The minority share holders should have provision to go to the court and seek redress for their grievances if any. 4. Any share holder if finds a wayward decision by the board or by the majority and notices that the corporation could get affected by such decisions, should be able to stop the action. It is more like pulling the chain to stop the train. 5. At the same time, it should also be understood, that these rights should not get misused by the share holders of the company. And any such proceeding against the company should be done so with the permission of the courts, as it happens in New Zealand12. Read More